Nuts & Bolts: NAGDCA Explains How to Offer a Self-Directed Brokerage Window

While brokerage windows offer retirement plan participants expanded investment choices, fiduciaries must navigate a complex landscape of provider selections, fee structures and investment parameters to ensure compliance with their responsibilities, according to guidance issued in March by the National Association of Government Defined Contribution Administrators Inc.

NAGDCA’s report noted that brokerage windows have long been a feature of retirement plans, giving participants the opportunity to invest in a broader array of options beyond the standard lineup chosen by plan fiduciaries. However, despite their established presence, many fiduciaries continue to wrestle with the potential impact of adding a brokerage window to their fiduciary risk, as it turns the decisionmaking over to the participant or a participant-appointed financial adviser.

A brokerage window allows retirement plan participants to establish individual brokerage accounts, providing them with the ability to invest in a wider array of investment products, such as mutual funds, exchange-traded products, stocks, bonds and certificates of deposit. This flexibility is in contrast to the more limited selection of designated funds typically offered by a plan, making it an appealing option for participants who seek more control over their investment strategies.

While the decision to offer a brokerage window is largely tied to plan design—especially when included in the plan document—it also comes with important fiduciary responsibilities, particularly in selecting the right service provider, the NAGDCA guide noted.

When considering the addition of a brokerage window, NAGDCA recommended that plan fiduciaries pay careful attention to several key factors.

First, selecting a brokerage service provider requires thorough collaboration with the plan’s recordkeeper and plan consultant, if they are not directly running the search. It is essential for plan fiduciaries to understand how the brokerage account functions, how participants will provide investment instructions and how the brokerage platform integrates with the overall retirement plan. Due diligence in this process is crucial to ensure that the provider’s capabilities align with the plan’s needs.

The NAGDCA guide indicated that fees and compensation are another critical area of focus for fiduciaries. They must fully comprehend the compensation structure of the brokerage service provider, including the costs associated with adding or maintaining a brokerage window, ongoing fees that participants may incur and any direct or indirect compensation—such as commissions and trading fees—earned by the provider. Transparency in fees is vital to protect the interests of plan participants and to fulfill fiduciary obligations.

Third, fiduciaries need to consider whether to implement specific investment parameters as part of the plan’s setup. This involves determining which investment products will be eligible or ineligible for participants, how participants will access information about these investment options and whether to impose limits on the amount participants can invest through the brokerage window. These decisions are important to manage risk and ensure that the brokerage window serves the plan’s objectives.

While offering a brokerage window can provide participants with greater investment flexibility, it also introduces additional fiduciary responsibilities.

The NAGDCA guide emphasized that the selection of the brokerage service provider, understanding and managing fees, and deciding on plan-specific setup are all crucial considerations that must be addressed to ensure the decision aligns with fiduciary duties and serves the best interests of plan participants.